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Robust Option Modelling

Frank Lutgens (f.lutgens***at***ke.unimaas.nl)
Jos Sturm (J.F.Sturm***at***uvt.nl)

Abstract: This paper considers robust optimization to cope with uncertainty about the stock return process in one period portfolio selection problems involving options. The ro- bust approach relates portfolio choice to uncertainty, making more cautious portfolios when uncertainty is high. We represent uncertainty by a set of plausible expected returns of the underlyings and show that for this set the robust problem is a second order cone program that can be solved eciently. We illustrate the approach for a benchmark tracking problem and discuss the added value of adopting the robust approach in a stochastic programming framework.

Keywords: Robust Optimization, Stochastic Programming, Portfolio Optimization, Nonnegative Cones

Category 1: Robust Optimization

Category 2: Linear, Cone and Semidefinite Programming

Category 3: Applications -- OR and Management Sciences (Finance and Economics )

Citation: Technical Report, University of Maastricht, 11/2002

Download: [Compressed Postscript][PDF]

Entry Submitted: 12/09/2002
Entry Accepted: 12/10/2002
Entry Last Modified: 01/08/2003

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